A natural monopoly exists when

Extra Credit

1. A “natural monopoly” exists when

A company creates a monopoly because it has an important patent

A company naturally creates a monopoly because it was more innovative than other competitors

One company can serve a market less costly than two or more firms.

 

2. True or False? Most public utilities are considered to be natural monopolies.

3. The presence of very large fixed costs and relatively low variable costs typically results in

A. Average costs declining throughout the relevant range of demand

B. A natural monopoly

C. Both A and B

D. Neither A nor B

 

4. An example of a Public Utility would be

Walmart

El Paso Electric Co.

Congress

Microsoft

5. The Public Interest Theory of regulation suggests

Government regulates to promote social economic welfare (as economists would prescribe)

Government regulates to promote their own welfare

Government should not regulate at all

None of the above

 

6. True or False? Stigler’s Economic Theory of Regulation suggests that people in government are self-interested individuals.

Suppose a power plant generates an additional 10 mWh of electricity for a profit of $100,000. This additional production also creates pollution damages to others equivalent to $120,000. From society’s view, the efficient decision is not to generate the additional power.

 

7. True or False? Under the Coase Theorem without transactions costs, the efficient decision will be made when the public has the right to receive damage payments.

 

8. True or False? Under the Coase Theorem without transactions costs, the efficient decision will be made when the power plant has the right to pollute.

 

9. True or False? If the market causing a negative externality has a property right to do so, the Coase Theorem would suggest that those being harmed would organize and make a payment to stop or limit the market activity.

10. The presence of transaction costs in the “real world” may

Give a rationale for government regulation.

Ensure that the Coase Theorem efficiency results always prevail.

Make it easy to organize people against a polluting company.

 

11. Why is it rational for groups affected by regulation to expend resources to influence regulatory decisions?

Government’s power of coercion may be used to redistribute wealth between groups of people.

Government will do what is best for the public interest.

Government regulation should be eliminated.

12. “Taxation by Regulation” (Richard Posner) suggests that regulation is used for what purpose?

Help airlines and other regulated industries.

Cross-subsidize certain markets or market segments.

Increase the general fund (tax revenues) directly collected by the government.

Protect the environment.

 

13. True or False? The “Capture Theory” of regulation is an extreme (polar) case of the Economic Theory of Regulation.

14. Which of the following is not an assumption under Professor Stigler’s “Economic Theory of Regulation”?

All actors in a political-economy are self-interested individuals who make decisions to promote their own welfare.

Public Utilities are Natural Monopolies.

Regulation is a power of the government to coerce individuals and firms through legally binding powers.

The power of coercion can be used to redistribute wealth from one group to another.

15. Why may a firm or an industry seek to be regulated?

A. To obtain direct subsidies

B. Control over competitive entry

C. Control over substitute services

D. All of the above

 

16. Which one of the following is not a factor affecting the level of political pressure exerted by an interest group (as stated by Professor Stigler):

Level of education - the more education within the group, the greater the effectiveness

Degree of self-interest – the more there is to gain or lose, the greater the expenditure.

Size of the group – greater the number of individuals, the greater the organizing costs, greater diversity, and free rider problems.

Group Homogeneity – similar goals among the individuals in the group.

 

17. National Defense is an example of a public good because:

There is no way to force someone to pay for it except through government taxation

It is very important to society

Private markets would not provide sufficient quantities of National Defense.

A and B

A and C

Negative Externality

Two possible marginal social cost curves when a negative externality exists (A and B).

 

 

P

Q

 

 

 

Marginal Social

Benefit (demand)

Marginal Private Cost

(supply)

Marginal Social Cost

 

A

B

0

18. Based on the negative externality diagram, the best government response to the situation described by curve B, is to

Implement a per unit tax

Implement a per unit subsidy

Make the market illegal, thereby banning all sales

All of the above.

 

19. Based on the negative externality diagram, the best government response to the situation described by curve A, is to

Implement a per unit tax

Implement a per unit subsidy

Make the market illegal, thereby banning all sales

All of the above.

 

20. Nutrition labels, warning labels, and financial disclosure to investors are government requirements intended to solve what market failure?

Imperfect Information

Public Goods

Natural Monopoly

Imperfect Competition

 

21. The economic rationale for government subsidization of education is:

It is a pure public good.

It is very important to society.

There are positive externalities.

None of the above.

22. If a company lobbies the government to limit the number of business licenses issued, and they do so to prevent competition and create monopoly:

This is an example of natural monopoly

This is an example of a public good

This activity is legal

This would create a negative externality.

 

 

23. One rationale for having a special tax per pack of cigarettes is that cigarette smoking creates a negative externality for others. These special taxes vary greatly from state to state, because

The individual state governments have precisely calculated the dollar amount of the negative externality in each state and it tends to differ from state to state.

It is probably viewed as an easy additional tax revenue source in some states.

Some states have more sinners than other states.

Cigarette smoking has been shown to lead to harder, illegal drugs, and those states with bigger problems with illegal drug markets tax cigarettes higher.

Examples of Market Failures: Natural Monopoly, Externalities, Public Goods. Understand possible government responses to each of these.

 

24. A pure Public Good

A. will not be provided in a private market.

B. has no value.

C. can be a toll road.

D. All of the above

 

25. Nonrivalry in Consumption refers to

A. not enough supply-side competition.

B. a characteristic of illegal drug markets.

C. enjoyment of the good does not deplete amount left for others.

D. consuming a large amount of national defense may prevent war.

26. Nonexclusion

A. is a characteristic of public goods.

B. is the inability to prevent consumption by someone.

C. causes a free-rider problem.

D. All of the above.

 

Questions 27 - 34: Per Unit Tax on Suppliers

 

 

 

 

 

 

 

Supply

Demand

 

 

Supply w/ tax

 

 

$4.50

$7.00

$5.00

Price

Output

A

B

C

D

E

F

27. The level of the tax is

A. $0.50; B. $2.50; C. $2.00; D. $7.00

28. The tax burden borne by the customers is

A. $0.50; B. $1.50; C. $2.00; D. $7.00

29. The equilibrium price after the tax is

A. $0.50; B. $1.50; C. $2.00; D. $7.00

30. True or False? If demand was less elastic (steeper), the tax burden on the customers would be more.

31. The tax burden borne by the suppliers is

A. $0.50; B. $1.50; C. $2.00; D. $7.00

32. True or False? If the same per unit tax was levied on the customers rather than on the suppliers, the demand curve shifts down by the amount of the tax.

 

33. With this change in government policy, the tax burden to the customers

A. Decreases

B. Increases

C. Stays the same.

 

34. The social welfare loss caused by the tax is equal to area:

A. ABC; B. BCEF; C. CDE

Negative Externality: Questions 35-37.

 

 

 

P

Q

 

 

 

Marginal Social

Benefit (demand)

Marginal Private Cost

(supply)

Marginal Social Cost

 

 

 

 

$7

$5

20

30

 

$4

35. In the diagram above, the efficient price/quantity combination is

A. $4/20; B. $7/20; C. $5/20; D. $5/30

 

36. Without government intervention, the private buyers and sellers in this market select

A. $4.50/20; B. $5/20; C. $6/20; D. $5/30

 

37. Government could realize the efficient combination by imposing a per unit tax equal to:

A. $5; B. $7; C. $1.50; D. $3

Negative Externality: Questions 44-46.

 

 

 

Output

 

 

 

Marginal Social

Benefit

Marginal Private Cost

Marginal Social Cost

 

$26

$22

$15

$0

 

5,000

38. The amount of externality per unit of output is

A. $11; B. $4; C. $7; D. $9

 

39. The socially efficient output is

A. zero; B. 5,000; C. infinite

 

40. True or False? The government should consider making this market illegal rather than imposing a tax.